Reflection Paper on these two chapters

profileKevGod12
Chapter31.ppt
Home>Business & Finance homework help>Economics homework help>Reflection Paper on these two chapters

CHAPTER 3
DEMAND FOR HEALTH:
THE GROSSMAN MODEL

Bhattacharya, Hyde and Tu – Health Economics

Intro

  • Previously…
  • Demand for health care is downward sloping
  • People choose amount of health care they receive based on price
  • People choose their health care, but do they choose their own health?
  • Is health something that happens to us? Or do we choose it?
  • We use the Grossman model to explore this question

Bhattacharya, Hyde and Tu – Health Economics

The 3 Roles of Health (H)

Health plays three roles in the Grossman model:

A consumption good

An input into production

A form of stock/capital (an investment)

Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

Health as a direct input into utility

  • Health as a consumption good enters directly into utility
  • Single-period Utility at time t

Ut= U(Ht, Zt)

  • Ht = level of health
  • Zt= “home good”
  • Everything non-health that contributes to utility
  • E.g. video games, time with friends, movie tickets

**Note: health ≠ health care

  • Health care is not explicitly in the utility function
  • i.e. Getting vaccines does not provide utility but staying healthy does

Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

Time constraints in the Grossman model

  • In a single period, there are only 24 hours in a day to contribute to your utility:

Θ = 24 = TW + TZ + TH + TS

  • Divide total time Θ between:
  • Working TW
  • Playing TZ
  • Improving health TH
  • Being sick TS

Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

Time constraint means time tradeoffs

  • Time working TW produces income
  • Buy things that contribute to utility (H, Z) but need to spend time in those activities (TH, TZ)
  • Time sick TS does not increase utility
  • Every hour spent sick takes away time to do other utility-increasing activities (loss time)

Health as a consumption good

Bhattacharya, Hyde and Tu – Health Economics

The labor-leisure tradeoff

  • Given levels of TS and TH, individual chooses how to allocate time between work TW and play TZ.
  • Optimal point decides on indifference curves
  • When health improves, more productive time is available for use
  • Pushes time constraint outward (from U0 to U1)
  • Can reach higher utilities

Health as a consumption good

Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

The three roles of health (H)

Health plays three roles in the Grossman model:

A consumption good

An input into production

  • Of health (H)
  • Of productive time (TP)

A form of stock/capital (an investment)

Bhattacharya, Hyde and Tu – Health Economics

Producing H and Z

Both Health and Home good Z must be produced with time and market inputs

Ht = H (Ht-1, TtH, Mt)

Zt = Z (TtZ, Jt)

  • Mt= market inputs for health H
  • Ex: weights, treadmill

  • Jt= market inputs for home goods Z
  • Ex: video games, opera tickets

  • Today’s health Ht also depends on yesterday’s health Ht-1
  • This is health’s third role as a stock which we discuss later

Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

Health affects production by lowering TS

TP= Θ – TS = TW + TZ + TH

  • Healthier you are, the less time you spend sick
  • TP is productive time spent on useful activities
  • Increased productive time can be reinvested into health (TH) or other useful endeavors (TW, TZ)
  • Only way to reduce sick time (TS) is to improve health

Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

Production Possibility Frontier

  • Production Possibility Frontier (PPF): the possible combinations of H and Z attainable, given an individual’s budget and time constraints

  • Standard economic PPF shows H and Z as substitutes
  • Wrong! Why?

  • Maximum Z is minimum H
  • If individual is at minimum H, they are dead and cannot produce any Z

Health as an input into production

An INCORRECT PPF

Problem point

Bhattacharya, Hyde and Tu – Health Economics

PPF in the Grossman model

  • Point A

Hmin: no productive time

for work, play, or

improvement of health

  • Point B
  • “free-lunch zone”
  • Small improvements in health yield large increases in productive time; can increase Z without giving up H

Health as an input into production

A CORRECT PPF

Bhattacharya, Hyde and Tu – Health Economics

PPF in the Grossman model

  • Point C
  • Maximum Z possible
  • Can’t improve health without taking away Z
  • If try to increase Z by shifting resources, sick time will increase and outweigh gain in resources for Z
  • Increases in health will not produce extra time to offset time spent improving health

Health as an input into production

A CORRECT PPF

Bhattacharya, Hyde and Tu – Health Economics

PPF in the Grossman model

  • Point D
  • “tradeoff zone”
  • Increases in H only yield small decreases in sick time
  • Increases in H, takes away from Z

  • Point E
  • Spend all time and money on health
  • Ignores all home goods

Health as an input into production

A CORRECT PPF

Bhattacharya, Hyde and Tu – Health Economics

Choosing optimal H* and Z*

  • Someone who values both H and Z chooses a point between C and E in order to maximize their utility
  • Chooses point F
  • U2 is unattainable given PPF constraints
  • At U0, an individual can attain more utility
  • At F: U1 and PPF are tangent
  • H* and Z* are optimal levels of health and home goods

Health as an input into production

Bhattacharya, Hyde and Tu – Health Economics

Exotic preferences and indifference curves

  • If individual only cares about home goods (Z)
  • Horizontal indifference curves
  • H* and Z* at point C

Cares only about Health H

Cares only about home good Z

Health as an input into production

  • If individual only cares about Health
  • Vertical indifference curves
  • H* and Z* at point E

Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

The three roles of health (H)

Health plays three roles in the Grossman

Model:

A consumption good

An input into production

A form of stock/capital (an investment)

Bhattacharya, Hyde and Tu – Health Economics

Lifetime of utility

  • On any day, an individual considers not only today’s utility U(H0,Z0) but all future utility as well!

  • Health is a stock; some of it carries over each new period

Home good Z is a flow (it lasts for only 1 period)

  • δ = individual’s discount rate
  • A person values utility now more than in the future
  • Ω = individual’s lifespan (total number of periods)

Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

Health depreciates over time

Some of yesterday’s health lasts to today but not

all of it

Ht = H ( (1- γ)Ht-1, TtH, Mt )

  • γ = rate of depreciation
  • Recall:
  • Ht = health at time period t
  • Ht-1 = health from previous period
  • TtH = time spent on health in period t
  • Mt = market inputs for health (like checkups and prescription pills)

Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

MEC curve and investments in health

  • Marginal Efficiency of Capital (MEC) curve:

indicates how efficient

each unit of health capital

is in increasing lifetime

utility

  • When level of H is low, small investments have high returns to productive time

Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

Costs to investing in health

  • Opportunity cost
  • Forgoes putting money into other investments
  • r = interest rate of alternative market investment
  • Depreciation due to aging (γ)
  • Health must pay a return of at least r + γ
  • If return is less than

r + γ, then market return beats health investment return

  • H* = optimal amount of health
  • Marginal cost balances with marginal benefit of health investment

Health as an investment

Bhattacharya, Hyde and Tu – Health Economics

Predictions of the Grossman model

The Grossman model helps explain why we

observe:

Better health among the educated

Declining health among the aging

Bhattacharya, Hyde and Tu – Health Economics

Health and education

  • Well-educated individuals are more efficient producers of health
  • College grads benefits more than a high school dropout.
  • Explanations?

Bhattacharya, Hyde and Tu – Health Economics

MEC and efficiency of health investment

Better educated are

more efficient at each

level of health

investment

  • MECC > MECH
  • H*C is higher than H*H

MECC = college graduate

MECH = high school dropout

Bhattacharya, Hyde and Tu – Health Economics

Predictions of the Grossman model

The Grossman model helps explain why we

observe:

Better health among the educated

Declining health among the aging

Bhattacharya, Hyde and Tu – Health Economics

Depreciation of health

  • Recall:

Ht = H ( (1- γ)Ht-1, TtH, Mt )

  • Depreciation γ is not constant
  • γ increases with age
  • As γ increases, costs

(r + γ) increase and it takes more resources to maintain same level of health

As a result of increasing depreciation γ over time, optimal health H* also declines over time!

Bhattacharya, Hyde and Tu – Health Economics

Optimal death in the Grossman model

  • Because of rising depreciation, there are better investments in the market than the individual’s health
  • H* eventually reaches Hmin
  • Why would anyone choose Hmin?
  • How is Hmin utility-maximizing?

Bhattacharya, Hyde and Tu – Health Economics

Conclusion

  • Is health something that happens to us or is chosen?
  • Grossman model says it is chosen
  • In fact, we even choose when we die
  • While that may seem far-fetched, Grossman model a useful tool for understanding the roles and tradeoffs of health
  • Next we use the Grossman model to understand empirical findings about the relationship between socioeconomic status and health